Blockchain

The next big thing in banking?

By Brandi Goode

Residents of Japan may soon be able to transfer money abroad in mere seconds, using only a mobile phone. For anyone who has suffered the current lengthy and costly international remittance process—which in most cases in Japan must be done in person—this is big news.

This summer, Thailand residents were able to receive funds in Thai baht, deposited in their local accounts, from family sending yen from Japan. The transfer happened in two to five seconds, a vast improvement over the standard two to five business days required for cross-border transactions. The service was launched as a collaboration between Japan’s SBI Remit Co., Ltd. and Thailand’s Siam Commercial Bank, and is one of the first commercial deployments of blockchain technology for payments in the region.

Blockchain, or distributed ledger technology, is based on an immutable store of records shared across an intricate network. Currently, banking across borders is a time-consuming and expensive process because, at each stage of the transfer, a bank or clearing house must review a transaction through a network provided by the Society for Worldwide Interbank Financial Telecommunication, better known as SWIFT. Blockchain eliminates the middlemen and middle-stage checks, making instantaneous transactions not only possible, but essentially foolproof.

Research by consumer credit reporting agency Experian PLC shows that error rates in international banking transactions can reach 12.7 percent, as new risk is added each time a payment passes through a new party. Because alterations to a distributed ledger are updated in real time and visible to each party in the network, it is nearly impossible to falsify records. There is no central data center that can be hacked, no chance for a sleepy teller to omit a zero or enter a nine instead of a six on a statement. This built-in security factor is one of blockchain’s greatest appeals.

Banks are taking particular notice, as the technology has the potential to dramatically improve the speed, efficiency, and scope of core banking functions such as import-export finance and derivatives trading.

PAY-VING THE WAYAs the birthplace of cryptocurrency, Japan is uniquely poised to become a leader in this emerging field of financial technology (fintech). Alisa DiCaprio, a past vice-chair of the American Chamber of Commerce in Japan’s Information, Communications, and Technology Committee notes: “We’re seeing entrepreneurs—both foreign and local—who are based in or attracted to Japan taking advantage of what’s seen as a regulatory structure that’s conducive to start-ups in this space.”

The government’s approval of Bitcoin as an official payment vehicle in April 2017 was a catalyst for many fintech initiatives. The move also signals great progress in Japan’s diversification of payment systems, explained DiCaprio, in an economy that is still largely cash-based.

Earlier this year, the Ministry of Internal Affairs and Communications revealed it is testing a blockchain-based platform to digitize the tender process for the fiscal year through March 2018. This would cut administrative costs and facilitate greater transparency in document exchange during the process.

Japan’s Financial Services Agency (FSA) has been instrumental in its support of blockchain and improving the country’s digital payment landscape. In a September 21 story, the Nikkei Asian Review reported that the FSA is helping spearhead a project using blockchain to simplify the process of opening accounts at multiple banks. At present, Japan’s stringent identity verification requirements can result in a wait of one week or more to receive a cash card after completing the application process.

Under the new system, account applicants would provide their personal information to a bank only once and be issued a shared ID. They would then provide the ID to new banks or financial houses using a smartphone app, and verify their identity with a fingerprint or facial scan. Accounts could be opened in minutes instead of days.

Faced with the Bank of Japan’s ongoing negative-rate policy and a shrinking domestic population—and the demand for credit resulting from this—Japanese banks have fallen on hard times. Blockchain technology offers a way to both modernize and cut costs, all while improving the customer experience.

WAVES AND RIPPLES
One year ago, SBI Ripple Asia—a partnership between Google-backed Ripple, a global provider of financial settlement solutions, and Japan’s SBI Holdings, Inc.—created the Japan Bank Consortium, a group of 61 institutions using Ripple’s distributed ledger technology to improve digital payment systems. The consortium represents more than 80 percent of total banking assets in Japan, and includes the nation’s three megabanks: Mizuho Bank, Ltd.; Mitsubishi UFJ Financial Group, Inc. (MUFG); and Sumitomo Mitsui Banking Corporation (SMBC). Among the benefits of the consortium is sharing the cost burden for blockchain experimentation.

Ripple Director of Joint Venture Partnership Emi Yoshikawa said: “The consortium will utilize Ripple’s solution to enable round-the-clock, real-time money transfers domestically and internationally at significant savings to both banks and consumers. It is currently building a production-ready version of RC Cloud, a next-generation payment platform, which will allow banks to transact domestically and internationally through a common interface. The consortium expects to launch RC Cloud within the next few months and see the first wave of banks in Japan go live with the platform.”

Ripple’s vision for the near future is the creation of an Internet of Value, wherein money is transferred as quickly as information over the internet. “The increased velocity of money will give rise to entirely new businesses and industries, as well as increase financial inclusion for millions of underbanked consumers,” Yoshikawa said, citing the industry term for consumers who lack sufficient access to services such as credit cards and loans.

PILOT PROJECTS
As a leader in the consortium, Tokyo-based MUFG announced its Re-Imagining Strategy in May. The megabank will focus on using fintech to add digital banking channels and streamline back-office functions. It hopes to boost profits by ¥200 billion through digitalization by 2023.

It also launched Japan’s first fintech accelerator program in 2016. One of the winners was Zerobillbank, a start-up that is currently helping MUFG develop a blockchain-based rewards program for one of its subsidiaries. This incubator program is a prime example of the symbiosis that’s possible between fintech start-ups and traditional banks. Working together means fintechs are granted access to big banks’ scale and customer base, and banks can leverage fintechs’ expertise in analyzing big data.

Hirofumi Aihara, general manager of MUFG’s Digital Transformation Division, told The ACCJ Journal: “Much of our blockchain work—be it with start-ups or even global groups—is currently at the proof-of-concept (POC) or pilot testing stage. The initial results have been promising, but we still need to work out various technical, legal, and practical considerations—both within the working groups as well as with the broader industry and regulators—before we can see anything concrete happen.”

This seems to be the case for most banks experimenting with distributed ledgers. There is a lot of work underway at the POC level, but little to no production-level implementation.

Mizuho, another of Japan’s banking giants, also has several blockchain initiatives in place to streamline operations in areas such as trade finance and syndicated loans. Its goals for the initiatives include improving customer service and cutting costs.

“Financial transactions are highly dependent on the network,” said Toshimi Teranishi, senior manager of the Digital Innovation Department at Mizuho Financial Group. “If underlying technology streamlines the network systematically or operationally, it brings the benefit of cost reductions. It will also reduce the time needed for relevant operations, allowing us to allocate employees to consultative works with customers to provide better service, which is our ultimate goal.”

Teranishi believes the adoption of blockchain systems will make Japanese banks more competitive. “When new services are developed, banks are better able to compete, not only with their direct peers but also with fintech companies.”

Though blockchain’s applications in banking are now in the spotlight, many other areas stand to benefit from the technology.

• Food traceability—because falsification of products’ origin is common

• Document management—to assure the original is retained despite changes and updates

• Voting—to ensure integrity of shareholder actions

Established in 2016, the BCCC includes 170 member companies from various industries. It works to popularize blockchain through three working groups—Financial, Smart City, and Risk Management—and organizes an annual half-day conference to share the latest blockchain applications. It also runs a blockchain university as an exclusive curriculum to educate engineers and planners.

Hirano notes that, while Japan’s tech companies are often at the cutting edge of new systems adoption, the uptake of potential breakthrough technology such as blockchain by traditional industry players is often slower here than in other countries. He says that major barriers include reluctance on the part of large companies to take risks, as well as a lack of software engineers employed within such companies, as systems are often built and managed by outside specialists.